As Oil Prices Fall…
The recent debate about the condition of Lagos state’s finances has once again highlighted the financial illiteracy and plain laziness of most public commentators. It also highlights the failure of the Nigerian press to properly educate the electorate about what the news means, and how it matters to them. This article properly lays out all the issues around the debt profile of Lagos, and should be the first port of call for any Nigerian interested in how his or her state is run.
The time has come for all of us to properly understand and question the process behind the sources of funding and patterns of expenditure at state and federal level, because events around the world could mean a change in our collective reality before long.
Nigeria has been run on the proceeds from crude oil for much of its history as a nation, and the ease with which a hole in the ground could bring forward ‘black gold’ and sold off in the international market with a minimum of effort by those in authority, meant that other areas of the economy died slowly and painfully, while successive governments paid lip service to ‘diversifying the economy’Oil prices have declined about 20% since June, and there are a number of reasons for this. The two largest economies in the world, the US and China, whose demand for crude oil has kept prices high for much of the last decade, save for the global financial crisis, have found shale oil. As it stands, the US is now the second largest exporter of crude oil in the world, behind Saudi Arabia. The Chinese have also discovered shale, lots of it, and will doubtless extract as much of it as they possibly can. In addition, slower global economic growth will also mean a reduction in energy demand. When you add the fact that improved drilling techniques have made previously inaccessible crude commercially viable to extract, albeit up to a certain price point, the realization is that an oil glut which will drive prices down is upon us.
A lot of Nigeria’s expenditure is still determined by sales of crude oil, and this is where states get their monthly federal allocations from, which brings me to the key point in that article: In the absence of federal allocations, Lagos is the most financially independent state in Nigeria today, because it is the only state that can cover its recurrent expenditure from Internally Generated Revenue, and is actually on track for a balanced budget in the medium term.
This achievement alone is little short of a miraculous given the existing standards, irrespective of what anyone thinks of certain policies of the Fashola administration, and it makes the candidacy of Akinwunmi Ambode a timely one. As Accountant-General of Lagos between 2006 and 2012, he claims to have revolutionized the way the finances of Lagos state were raised, budgeted, planned and managed.
These are the kind of policy credentials that the electorate should be looking for, and I expect Mr. Ambode to have good ideas with respect to growing the tax base and reducing expenditure as much as possible. Declining oil revenues means a reduction in allocations to states and the Federal government, and one of the key questions I hope will be asked to all those contesting gubernatorial and presidential elections next year, is how they will adjust to this prospect.
If they have no plans, I suggest they get one, because it will turn out very handy. May 29, 2015 is still some way off, and the allocations available to states could be very different to what obtains now. Nigeria has to find buyers for its crude, probably at reduced prices, and at the same time reduce oil theft that is robbing the nation of revenues. In addition, the Petroleum Industry Bill has become swallowed up in controversy, making the path ahead for the sector murky.
Since oil was first discovered in Oloibiri in 1956, Nigeria has squandered at least four periods of high oil prices, with very little to show for it. It would be tragic, but not too surprising, if when the party gradually comes to an end, there is no plan for that as well.